Investing.com -- S&P Global Ratings has revised the outlook for T-Mobile US (NASDAQ: TMUS ) Inc., the U.S.-based wireless service provider, to positive from stable. This change is due to the company’s strong earnings growth and free cash flow generation. Despite aggressive competition and mature industry conditions, T-Mobile has continued to grow its postpaid market share, service revenue, and earnings. This success is attributed to its strong brand reputation, network assets, and favorable pricing relative to its peers.

S&P Global Ratings has adjusted its leverage thresholds for T-Mobile’s ’BBB’ issuer-credit rating from 3.00x to 3.75x to 3.25x to 4.00x. This adjustment reflects solid wireless industry fundamentals and T-Mobile’s strong position in the U.S. telecommunications market. The company’s net leverage is expected to remain around 2.5x, approximately 0.7x higher on an S&P Global Ratings-adjusted basis.

T-Mobile has followed an aggressive merger and acquisition strategy, along with shareholder returns. There is some risk to this forecast, including the possibility of debt-financed mergers and acquisitions that could push leverage above the 3.25x upgrade threshold. Therefore, all ratings, including the ’BBB’ issuer-credit rating, were affirmed.

S&P Global Ratings expects T-Mobile to generate around $17.5 billion of free operating cash flow (FOCF), which will be more than offset by $14 billion of shareholder returns and about $11 billion of acquisitions. As a result, its adjusted leverage is likely to remain in the low-3x area over the next couple of years.

Since its 2020 acquisition of Sprint Corp., T-Mobile has improved its market position and led the industry in postpaid subscriber growth. This growth is due to increased penetration in rural markets and among business customers. T-Mobile derives almost all its revenue and cash flow from wireless operations. The company has an approximate 30% share of the high-margin postpaid market, compared with 35% for Verizon (NYSE: VZ ) and 27% for AT&T (NYSE: T ).

Despite the competitive disadvantage relative to its peers, particularly with fiber broadband, T-Mobile continues to take mobile share even in areas where competitors have fiber. T-Mobile has been aggressive in marketing and bundling fixed wireless access (FWA) with mobile service, which can offer a satisfactory broadband alternative. The results have been overwhelmingly positive, with FWA taking share from cable broadband and digital subscriber line (DSL) service. T-Mobile currently provides service to about 6.9 million customers and expects to have over 12 million by 2028.

T-Mobile has less exposure than its peers to declining legacy products and networks. The company does not derive any revenue from the business wireline services market, which faces secular industry pressures as customers transition to new technologies.

During its September 2024 analyst day, T-Mobile announced that it expected to have about $80 billion of financial capacity through 2027. The company plans to use up to $50 billion for shareholder distributions, leaving $19 billion for incremental investments, shareholder returns, or leverage reduction. S&P Global Ratings expects T-Mobile to manage shareholder returns and M&A such that it remains at its net leverage target of 2.5x.

S&P Global Ratings expects T-Mobile to continue to take share and grow its high-margin postpaid subscriber base, contributing to healthy service revenue growth. The U.S. wireless industry added about 9.1 million postpaid phone subscribers in 2024, and it is expected that T-Mobile can continue to take at least one-third of the industry’s net additions, well ahead of peers AT&T and Verizon.

The positive outlook reflects S&P Global Ratings’ expectation for solid 5%-7% earnings growth supported by steady industry fundamentals, market share gains, and service revenue growth of around 5%. S&P Global Ratings could revise the outlook to stable if the company experiences higher churn due to aggressive price-based competition or macroeconomic weakness, resulting in slowing postpaid net subscriber additions, more muted EBITDA growth, and S&P Global Ratings-adjusted leverage rising above 3.25x on a sustained basis. The ratings could be raised if T-Mobile continues to increase market penetration across key verticals and maintains healthy EBITDA growth and FOCF.

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